Capitaland Retail China Trust announced a planned acquisition of 3 malls from their sponsor Capitaland recently. As a unitholder, I obviously have a vested interest to know more. Here are the key highlights, with some financing structure speculation at the end.
Property Highlights
Summary
The 3 properties consist of CapitaMall Xuefu and CapitaMall Aidemengdun in Harbin, and CapitaMall Yuhuating in Changsha. Changsha and Harbin are the respective provincial capitals of Hunan and Heilongjiang. This continues the REITs recent trend of acquisitions and diversification away from Tier 1 cities into more Tier 2 cities.
Bulking up
AUM for CRCT will increase by 19% to S$3.8 billion. This desire to bulk up is in line with recent S-REIT M&A trends to make themselves more attractive to institutional investors and allow them to add more weapons to their arsenal to grow.
Purchase Valuation and NPI Accretion
2 valuers were engaged as part of this transaction – Cushman & Wakefield and JLL. The agreed purchase price was at a discount of 1.2% and 0.2% to the respective valuations.
Acquisition Cost and Financing details
Total acquisition cost is expected to be $505.4m comprising of:
- Purchase consideration & shareholder loan – $489m
- Acquisition fee to managers – $5.9m
- Professional and other fees – $10.5m
Financing debate
It is due to the lack of financing details that led to the quick sell-off in the unit price of the REIT.
I’ve read conflicting analyst research reports on whether a DPU accretive deal can be structured. OCBC broke ranks and even downgraded the REIT to SELL from HOLD off of this news. This is probably partly why the REIT sold off this week.
Separately, CEO Tan Sze Wooi in an article with The Edge Singapore (premium article) gave some insight to management’s thinking:
On DPU Accretion - "Based on the funding plan we are going to settle on, there will be accretion to unitholders, and at the NPI level, and we are confident of putting in place a financing plan to deliver accretion"
On growth targets - "We will grow [around] 20% with this deal size, and for the next cycle of acquisition, we would be looking at close to a further 20% growth, and we hope to achieve $5 billion in assets soon. This is so that we can compete better in cost of capital. We are always working hard to see how we can strengthen the REIT and rejuvenate the portfolio"
On urbanisation and CRCT's strategy - "We want our malls to be a solid magnet for the catchment populations within a radius of three to five km. And even though lifestyles evolve over time, we want our offerings to grow in tandem with our customers’ tastes. Urbanisation will continue; that is why you have new catchment areas and people will want to go somewhere to socialise. That is why we have to keep injecting freshness, and our trade mix requires constant tweaking. For instance, we’ve lowered our exposure to department stores and fashion, and we’ve injected F&B outlets, and are focusing on beauty and healthcare services and education. All the malls are in catchment areas near transport nodes served by public services and are near amenities. So, they [get] habitual repeat customers, and this is the kind of stickiness from customers we are building"
In one paragraph, the article even describes pro-forma impacts of the acquisition. Given the way it was written, I wasn’t sure if this was the view of The Edge or the CEO’s view but here it is:
Tan says he is comfortable with a gearing of 38% compared with CRCT’s gearing of 35.5% as at March 31. That provides CRCT with a debt headroom of around $339 million and the remaining amount of about $249 million needs to be raised via an equity issue. With units outstanding of 998.52 million as at March 31, CRCT’s equity raising would be within 20% of its market capitalisation (based on its general mandate), which could be achieved through a placement and preferential equity offering, providing an accretion of up to 1.7% to DPU. Based on FY2018’s DPU of 10.22 cents, pro forma DPU, including the acquisition, could rise to as high as 10.4 cents.
My independent calculation
Given all the conflicting views, who is right?
I decided that the only way to know is to do the rough work myself and form my own opinion.
Disclaimer: I approached this exercise logically based on my accounting and REIT knowledge. As to why my calculations gave slightly different results from the professional analysts, I have no idea. Do let me know where I messed up (if any) so that I can learn as well.
Funding mix
I worked backwards by making adjustments to total assets by adding target property value and removing distributions that have yet to be paid. I apply a 38% target gearing mentioned by the CEO and compared it to current borrowings to obtain the debt headroom. I obtain the corresponding equity to be raised by subtracting debt headroom from the cash consideration associated with the acquisition.
Based on this computation, I arrive at a funding mix of $324m of debt and $275m of equity to be raised. Pretty close to what is in the article by The Edge.
Pro-forma NAV impact
Using the expected equity fund raise of $275m and taking into account acquisition fee of $5.9m that will be paid in units, I plotted a graph of Pro-forma NAV vs Equity Issue Price from $1.20 to $1.60.
At issue price of $1.51, yesterday’s closing price, pro-forma NAV is expected to be about $1.58. This represents a slight dilution in NAV from $1.59.
Of course, rights / private placements will be issued at a discount to current share price to attract interest. Pro-forma NAVs range from $1.52 – $1.58 depending on the issue price from $1.20 to $1.50.
On this evidence, NAV dilution is not expected to be great for this acquisition.
Pro-forma DPU impact
Computing pro-forma DPU can be very complicated and with limited information, I could only guess. As such, I did a very rudimentary computation of distributable income by making adjustments to FY2018’s figure.
Key assumptions:
- Debt financed at 2.96%, CRCT’s current cost of debt
- Base Management Fee
Given that DPU for FY2018 was 10.22c, the acquisition is expected to be yield accretive as long as the equity issue price is higher than $1.32.
My guess
Based on my earlier calculations, the acquisition is likely to be DPU accretive and NAV neutral to slightly dilutive. Given where CRCT is trading now and what my calculations show earlier, it’s safe to say that the fund raising mix is likely to be a private placement cum preferential offering as indicated in The Edge’s article, with the preferential offering price likely to be within the $1.40s range.
Given this expected structure, I think it is overall a positive deal for the REIT.
Caveats
There are 2 factors that might push the REIT to raise more equity than anticipated, which will push the yield accretion of the deal downwards.
- The CEO has expressed a desire to hit $5b of assets under management. Post acquisition, the REIT will be at $3.8b of AUM. With the REIT hitting 38% gearing in my proposed deal structure, it leaves little room for further acquisitions. As such, the REIT may raise more equity to push gearing back down for future acquisitions.
- The swap deal where CRCT swaps CapitaMall Saihan for a mall in Hohhot is slatted to close only in 2H 2020. As part of that deal, CRCT has to cough up another about RMB$350m of cash to complete that transaction. As such, the REIT may raise more equity as well in preparation for that transaction.
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